3 Dividend Stocks to Buy in an Inflation-Driven Bear Market | The Motley Fool (2024)

The U.S. Bureau of Labor Statistics recently reported that the consumer price index rose 1.2% on a monthly basis in March and a whopping 8.5% over the last 12 months. That year-over-year increase represented the highest level since 1981, and there's a risk that the continuation of the trend could push the stock market into a new bearish phase.

That's a worrying thought, but the good news is that it could also create conditions that allow some stocks to thrive. With that in mind, we asked a panel of Motley Fool contributors to spotlight top stock picks for an inflation-driven bear market. Read on to see why they identified Walmart (WMT -0.35%) The Kraft Heinz Company (KHC -1.29%), and ExxonMobil (XOM 0.56%) as good ways to play current inflationary trends.

A retailer built to handle inflation

Daniel Foelber(Walmart):There's a reason why stocks like Walmart, Costco Wholesale, and Procter & Gamble are hovering around their all-time highs while the broader indices tumble. All three companies have strong balance sheets and are leaders in their respective industries. And all three have pricing power that makes them uniquely positioned to combat inflation.

The investment thesis for Walmart is beautifully simple. When prices are rising, consumers will try to curb their spending. They may not be able to control prices at the pump. But they can control their discretionary spending to a degree. That could mean buying more goods at Walmart and fewer at Target -- and certainly fewer at Williams-Sonomaand other high-end retailers. One glance at the stock chart of RH, for example, will tell you everything you need to know about the market's reaction toward high-end retailers in an inflationary climate.

Even after quietly producing a 137% total return over the last five years and outperforming the S&P 500, Walmart stock is still relatively inexpensive. It has a forward price-to-earnings ratio of 23.3. What's more, Walmart is a Dividend Aristocrat that has paid and raised its dividend for 47 consecutive years. The company routinely uses extra free cash flow to raise the dividend and repurchase its own stock -- which is a great way to create shareholder value in addition to reinvesting in the core business.

Add it all up, and Walmart's blend of short- and long-term upside, value, and income make it an excellent safe stock to consider now.

All-weather friendly

James Brumley (Kraft Heinz): An inflation-resistant stock should really meet three criteria: The underlying company must be able to pass its higher costs along to its customers, its products must be something the world has to buy regardless of their price, and ideally, the stock should offer a healthy dividend yield. See, a premium is placed on extra cash flow when dollars lose their relative value.

For me, a consumer goods name like The Kraft Heinz company checks off all of those boxes.

The company is more than just ketchup these days. Kraft Heinz is parent to Oscar Meyer deli meats, Jell-O, Ore-Ida French fries, Kool-Aid, and Velveeta, just to name a few. Not only does at-home eating ramp up when restaurants' prices turn painful (people have to eat something), but this organization offers some of the world's most familiar, value-minded goods.

And, we've already seen it successfully pass along its increased costs to consumers. That's how it was able to top its Q4 earnings estimates, when inflation really started to soar in earnest. The profits supporting its above-average dividend yield of 3.9% are, all things considered, pretty well protected.

Oil is at the heart of inflation trends

Keith Noonan (ExxonMobil): In light of recent trends, it might seem borderline incomprehensible that oil prices briefly dipped into negative territory roughly two years ago. Pandemic-related conditions previously created a glut of supply, to the extent that oil production exceeded existing storage capacity. But there's been a dramatic reversal as economies have reopened and demand has soared.

Rising oil prices are a core driver in the overall inflationary trends that are now creating an entirely different kind of economic concern. To some extent, the price of oil impacts practically every industry under the sun, and it's one of the single most important components in current inflationary trends.

While many companies are facing pressures from rising costs, ExxonMobil's profits are jumping thanks to surging oil prices, and it could be one of the companies best positioned to be a strong performer if high levels of inflation push the stock market into bear-market territory. Exxon is a titan in its industry, and its massive scale and diversified business model have historically allowed it to post strong performance even when conditions are less favorable than they are at present.

If high levels of inflation continue to shape economic conditions along current lines, it's likely that Exxon will perform well relative to the market at large. Even if high inflation were to push the economy into recession and result in consumers and businesses cutting back on oil and energy usage,the demand outlook remains favorable for the company.

While some progress is being made with alternative energy technologies, trends including the rise of the global middle class, overall population growth, and the ongoing expansion of the worldwide economy mean that oil has also never been more important. Exxon mobile also pays a substantial dividend, and its current yield sits at a hefty 4% despite recent valuation gains. With profits climbing and favorable performance trends on the horizon, ExxonMobil stock looks poised to outperform and beat inflation.